Saturday, June 23, 2018

Examples of opportunity loss

Suppose you have a situation where you take an entry signal only for the position to go nowhere, so you end up getting frustrated and close the trade. The next thing you know, the stock takes off in the direction you were attempting to trade, leaving you left on the sidelines. What have you lost? 

Some people would say that, as you haven't lost anything, you should simply move on and concentrate on what is happening in front of you now.

While I agree with the fact that you need to move on, I would  disagree with the point about not having lost anything - there is an opportunity loss incurred. 

I recently suffered from such an experience. I attempted to trade a stock a couple of months back, only to be stopped out for a small loss. The stock then set up again, but as an earnings release was imminent, I took the stock off my watchlist and forgot about it.

A couple of weeks later, I happened to see the same stock come up on a list of top movers, so out of interest I called up the chart to see what had happened. 

What I found was that price did not suffer a price gap in either direction following the earnings release, so the set up was still valid. And what do you know, it subsequently broke out to the upside beautifully. 

So to me this was a clear example of a lost opportunity, all caused by being too impatient and removing the stock from my own watchlist.

Here is another example where a friend told me about a situation from a couple of years ago, which occurred when he was about to go on holiday:

He was very good at identifying great setups to trade, and had set up an automated process to ensure that he took all the valid signals should they trigger an entry. 

On this occasion, he had identified a setup in a stock (which I also happened to be watching). On the day he was leaving the country, he switched his system off, and as he was fully out of the market, decided to forget about the markets for a while, and enjoy his vacation. 

As the stock he had been watching finally broke out, he was in the departures lounge at Heathrow Airport waiting to board his flight. You can guess what happened. That missed entry and trade would have resulted in the most profitable trade of his year, which would have completely transformed his results.

Two further examples of similar types of opportunity loss, involving a couple of famous traders:

Jesse Livermore described how a lack of patience with a set up in cotton caused him to tell his Office Manager Harry Dache to remove the ticker. This created "The Million Dollar Blunder" which he described in his book How To Trade In Stocks

And, in his New Market Wizards interview, Tom Basso talked about a time where he traded every signal his system had generated over an eight month period. Then one week, while playing host to friends, he missed a signal on a silver trade. That one trade would have generated an approximate sixfold increase in his account.

So, you still think you've lost nothing?

So while it is true that you physically haven't lost any money, when you experience such an opportunity loss, all you can do is try and learn from it, and resolve to work on a solution to ensure you eliminate this potential profit 'leakage' from your trading.

You can actually class these as trading 'mistakes' and quantify them in terms of R. Missing entries that you should have taken results in a reduction in your trading efficiency. Identifying, quantifying and coming up to a solution to these issues should form part of your periodic reviews of your own trading performance.

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